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When Shareholders Crack the
Whip

IN a promising show of
force by a company’s owners, three directors at
Texas Industries, a construction materials maker with almost $850
million in sales, got the boot last week. Taking their seats at the
boardroom table will be directors nominated by Shamrock Holdings, the
money management firm best known for helping to oust
Michael Eisner from his perch as chief executive of
Disney.

The
results of the Oct. 22 election at Texas Industries, disclosed last
Tuesday, are an example of what happens when shareholders act
appropriately — like the company owners that they are. Equally
important, Shamrock executives say they believe their win at the company
shows that shareholders are becoming increasingly willing to take on
entrenched directors.

Directors, of course,
have a fiduciary duty to look out for shareholders. Instead, many
directors have simply served as rubber stamps for the chief executives
they are supposed to be overseeing.

While no single election
proves that investor attitudes are a-changing everywhere, the Texas
Industries slapdown was unambiguous. More than 80 percent of the shares
cast at the meeting were voted against the incumbent directors; more
than 90 percent of those shares were voted for three proposals put
forward by Shamrock.

One proposal required
the company to submit its anti-takeover mechanism, a “poison pill,” to a
shareholder vote; the other two argued that directors should be made to
stand for elections annually (making it easier to oust an incompetent
board member) and that directors in uncontested elections could win
their seats only if they received a majority of shares in support.

Shamrock’s executives
have taken the activist road for many years, and if they think
shareholders are becoming more active then it’s time to cheer.

“I cannot remember where
a significant corporation of this size got an 80 percent turndown from
its own shareholders,” said Stanley Gold, chief executive of Shamrock.
“People are beginning to think like owners.”

A LITTLE background:
Texas Industries’ stock has underperformed its peers consistently over
one-year, three-year and 10-year periods. Not surprisingly, its
shareholders are anxious, and over the past two years a growing number
of them have expressed displeasure to Texas Industries’ directors.

For example, director
elections in 2007 didn’t go well for two incumbents, who received “nay”
votes from one-quarter of the shares cast. At last year’s election,
almost half of the votes cast were against the incumbent directors.
Nevertheless, the Texas Industries board didn’t seem to “get” these
messages. Indeed, when a director resigned last year, he was replaced by
a former board member from a few years earlier.

After analyzing the
company, Shamrock concluded that it was an undervalued asset whose
prospects were stymied by arrogant and unaccountable management. The
investment firm started buying the stock in the second half of 2008.

Initially, when Shamrock
wrote letters to the Texas Industries directors suggesting how to change
the company’s governance practices, it received no response from them.
“We had a real tough time getting management to sit down and talk to
us,” Mr. Gold said. “The chief financial officer finally did, and late
in the game, the C.E.O. and ultimately the chairman came by. But fair to
say, while the conversations were polite, they just stonewalled us.”

A spokeswoman for Texas
Industries didn’t respond to two requests for an interview.

Shamrock decided to take
its case to the company’s owners. In late June, the three directors it
was proposing for board seats fanned out across the country, meeting
with big investors and making their arguments for change. They were
Marjorie L. Bowen, a former managing director of Houlihan Lokey Howard &
Zukin, an investment firm; Gary L. Pechota, a former chief executive of
Giant Cement Holding; and Dennis A. Johnson, a managing director at
Shamrock.

Mr. Johnson said he met
with two dozen investors in person and spoke by phone with others. It
helped that Texas Industries shares were largely in the hands of
institutional investors rather than individuals.

“Within the first three
weeks I met with investors representing probably 60 percent of the
shares outstanding,” Mr. Johnson said. “We pursued the proxy contest
conveying our message that this is an undervalued company with a lot of
potential and our assessment of what some of the solutions to this
problem could be. We wound up by asking the shareholders to get on board
and help effect this change with us.”

The meetings went on
until the day before the Texas Industries annual meeting on Oct. 22, Mr.
Johnson said. “We didn’t run across anyone who said they opposed what we
were doing,” he added.

At the annual meeting,
Mr. Johnson said the company let him make an eight-minute speech
outlining Shamrock’s reasons for taking up the proxy fight.
Nevertheless, when shareholders at the meeting asked questions of Mr.
Johnson, the board didn’t allow him to answer, he said.

Once the vote was
tallied, it showed that Shamrock’s message had come through loud and
clear to shareholders, including public pension investors and private
mutual funds. While public funds have been more willing to take up
such fights, Mr. Johnson says he’s now seeing an interest among mutual
funds that previously shunned the activist route.

“In the past, you had a
lot of skepticism about activist investors that prevented large
institutional investors from wanting to talk to you,” Mr. Johnson said.
“Secondly, there was this natural conflict where a lot of institutional
investors wanted to make sure they would continue to have access to
management of the companies they own. But that is less the case today,
and that’s why it’s very good for shareholders going forward.”

To be sure, a proxy
battle like Shamrock’s is expensive and out of the reach of many
investors. Mr. Gold estimated that his campaign cost roughly $1 million,
adding approximately $1 a share to his firm’s cost basis in the stock.

Such costly battles
illustrate why it’s crucial that shareholders be allowed to put up
alternate slates of directors without having to spend millions of
dollars, Mr. Gold said.

“There needs to be
democratization of the boardroom,” he said. “Boardrooms will say it will
be like Congress and everyone will be arguing. But capitalism is based
on democracy: it is a bit messy, but it’s the best system we’ve come up
with.”

A version of
this article appeared in print on November 1, 2009, on page BU1 of the New
York edition.

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